Donor Advised Funds for Charitable Giving
by Jack Whitley with contributions from Dennis Doble and Alison Wilcox
Are you someone who wants to give back by donating to a charitable organization? If so, let us introduce you to donor-advised funds, the fastest growing charitable gift strategy for investors. A Donor-Advised Fund (DAF) is a private fund administered by a third party and is created to be a simple, flexible, and tax-efficient way to donate to your favorite charities. Donor-advised funds have recently grown in popularity due to their ease of use and unique tax benefits and could be the right strategy for you depending on your investment preferences. In this article we will go over how a DAF works, the benefits of a DAF, and how they can be used to support charitable organizations.
How a donor-advised fund works:
A donor makes a tax-deductible donation in the form of cash, stock, or other non-publicly traded assets (i.e., cryptocurrency, private company stock) to any IRS-qualified public charity to be eligible for an immediate tax deduction. Any contribution to a donor-advised fund is considered to be an irrevocable commitment to charity, which means that the funds cannot be returned to the donor or used for any purpose other than providing grants to charities. A unique feature of a donor-advised fund is that the donated assets can remain in the fund indefinitely, which means that any contribution has the potential to grow, thereby increasing the amount of funds available to charities. Donors can then recommend that their financial advisors manage the charitable assets using a wide range of investment strategies, thus providing the best opportunity for the donated dollars to grow.
Once the assets are donated to the DAF, an investor can support any IRS-qualified public charity by making grant requests from the DAF. Investors can choose whether to remain anonymous when making grants to charity, and can specify a particular use, campaign, or purpose for the grant recommendation.
Benefits of a donor-advised fund:
1) A wide range of assets are generally accepted. Examples include:
- Cash Equivalents
- Publicly traded securities or mutual fund shares
- Restricted stock
- Private equity and hedge funds interests
- Certain complex assets (privately held C-corp & S-corp shares)
2) Tax Benefits
As soon as a charitable donation is made, the donor becomes eligible to receive an immediate tax deduction. However, there are rules that govern the tax deduction, based upon which class of assets is ultimately donated to the charity. If a donor elects to donate just cash, then they become eligible for an income tax deduction of up to 60% of their adjusted gross income. If instead, a long-term appreciated asset is donated, then the donor becomes eligible for an income tax deduction of up to 30% of their adjusted gross income, and the capital gains tax on the asset is eliminated as long as it's been held for more than one year.
Charitable Impact and Legacy
DAFs are a wonderful tool for use in establishing a legacy of giving. Heirs and loved ones can be part of the process of distributing grants to charity and can even be named successor grant advisors to allow the DAF to last beyond a single lifetime and for generations to come.
This article is intended to present you with one option for charitable giving. There are many factors to consider when deciding whether this strategy is advantageous for you. As with any financial strategy, please do your own due diligence and talk with your advisor or CPA to determine whether this is best for you.
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